Using the size of CEO signatures in SEC filings to measure individual narcissism, we find that CEO narcissism is associated with several negative firm outcomes. We first validate signature size as a measure of narcissism but not overconfidence using two laboratory studies, and also find that our measure is correlated with employee perceptions of CEO narcissism used in prior research. We then use CEO signatures to study the relation between CEO narcissism and the firm’s investment policies and performance. CEO narcissism is associated with overinvestment, particularly in R&D and M&A expenditures (but not in capital expenditures). Firms led by narcissistic CEOs experience lower financial productivity in the form of profitability and operating cash flows. Despite this negative performance, narcissistic CEOs enjoy higher absolute and relative compensation. Our results are robust to several alternative specifications, including controlling for a popular options-based overconfidence measure used in prior research.
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The notion of a poor correlation is subjective, but Carey et al. (2015) find that personal pronoun usage has an insignificant correlation with narcissism scores at r = 0.01.
Narcissistic CEOs who are concerned with short-term financial performance may also be incentivized to reduce R&D expenditures if doing so would allow the firm to exceed near-term earnings targets, possibly at the expense of long-term growth (Baber et al. 1991). Such incentives would likely bias against finding a positive association between CEO narcissism and R&D expenditures.
We acknowledge that certain capital expenditures, such as building a new headquarters, could result in public recognition. However, we believe capital expenditures will tend to be more routine in nature relative to R&D and M&A expenditures. For example, Apple is known as a company that builds flashy technology, retail stores, and headquarters. However, Apple’s 2016 Annual Report indicates that the majority of its capital expenditures went to “machinery, equipment and internal use software.”
Foster et al. (2003) find a standardized (scaled so that 0 is the lowest score and 1 is the highest score) narcissism score of 0.38 for participants aged 20 to 24 years. Our similarly aged participants had a comparable standardized score of 0.36.
To mitigate the influence of outliers we rank the area-per-letter signature size measure in the experimental analyses. We are unable to winsorize the measure (as we do in the archival analyses) due to the small number of observations. Our inferences remain unchanged if we log transform or make no adjustment to the area-per-letter measure.
We also examine how frequently signature size and NPI-16 scores fall into the same quartile. Whereas chance would predict an exact rank match between signature size and NPI 25% of the time, we find that signature size and NPI have an exact rank match 39% of the time.
Charles O’Reilly, personal communication via e-mail, February 10, 2017.
This is due to data collection constraints. While obtaining the size of a CEO’s signature is not as complicated as gathering some alternative personality trait proxies, it is nonetheless a costly process. For this reason, we constrained our sample to the S&P 500 companies as of July 2011, when the data collection began.
Though it may seem logical to collect multiple signatures to analyze time-series effects of narcissism, psychology research suggests that narcissism is a stable personality trait (Raskin and Howard 1988). Thus, between-CEO differences should be much larger than within-CEO differences. The time consuming nature of signature collection also makes collecting multiple signatures for each CEO very costly.
Because we use the Execucomp database to identify CEOs and the corresponding years in office, our sample period is restricted to the period 1992–2015.
Table 1 reports the descriptive statistics for executive age, executive tenure, and total compensation before the log transformation.
Subscript i denotes firm, subscript j denotes CEO, subscript t denotes year.
We include these CEO characteristics to control for other sources of variation in CEO behavior, and to capture other potential variation in CEO signatures. For example, a CEO’s signature may be larger or smaller depending on gender, physical characteristics, upbringing, or education. If older CEOs learned to write their signatures in a more artistic or embellished manner, this would introduce noise in our measure. Controlling for CEO age, tenure, and gender should aid us in assuming that any remaining differences in signature size are randomly distributed across CEOs. However, all inferences remain unchanged if we omit controls for these CEO characteristics.
Our inferences remain unchanged if standard errors are clustered by firm and year.
In unreported analyses we also find that firms led by narcissistic CEOs invest more in advertising expenditures, which could be considered another “high-exposure” investment category.
Our inferences remain unchanged using several other models of the expected level of investment from prior studies, such as those where the independent variables include (i) sales growth (Biddle et al. 2009), (ii) sales growth, a negative sales growth indicator variable, and the interaction between the two variables (Chen et al. 2011), (iii) Tobin’s Q and operating cash flows (McNichols and Stubben 2008), or (iv) lagged investment, leverage, cash holdings, firm age, total assets, returns, and a proxy for growth opportunities (V/P) (Richardson 2006).
In Table 3, the coefficients on the main effects for SIGSIZE and SLACK are both positive and significant if demeaned.
Our inferences remain unchanged if we define ROA as net income scaled by prior year total assets.
Total compensation is the variable tdc1 in the Execucomp database.
We thank an anonymous reviewer for this suggestion.
The results are similar if we use a three-year period before the CEO’s first year in office, with the exception that IND(M&A) becomes insignificant in column (2).
We are not always able to identify the CEO’s true first year in office if the CEO’s first year in our sample is also the firm’s first year of Execucomp coverage. Therefore, we only retain firm-years in which we can identify the predecessor CEO in Execucomp.
E-Index data are obtained from the Institutional Shareholder Services database.
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We thank Patricia Dechow (the editor), two anonymous reviewers, Jennifer Conrad, David Hirshleifer, Michael Kimbrough, Andrew Knight, Mark Lang, Christian Lundblad, Justin Leiby, Merih Sevilir, Geoff Tate, Devin Williams, Paul Zarowin, Emanuel Zur, Yue Zheng, Richie Zweigenhaft, and seminar participants at the FARS 2013 midyear meeting, AAA 2014 annual meeting, University of Baltimore, Emory University, University of Florida, and University of Maryland for helpful comments. We thank Jin Kyung Choi, Jeff Ouyang, Chase Potter, and Kai Wang for research assistance.
Appendix 2: Signature examples
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Ham, C., Seybert, N. & Wang, S. Narcissism is a bad sign: CEO signature size, investment, and performance. Rev Account Stud 23, 234–264 (2018). https://doi.org/10.1007/s11142-017-9427-x
- CEO narcissism
- Signature size